Earnings driven by strong fund momentum

First half earnings were 23% up on the second half of FY16 (100% ahead of H1’16). That reflects six consecutive quarters of strong growth in assets under management and advisory (AUM). Total net inflow was a record £870m in the first half, and the value of the group’s listed equity funds grew by £340m, or 8.2%. That combined is equivalent to a 27% increase in AUM to £5.7bn, while another very good month pushed that above £6.0bn by end April. The interim figure included $1bn for North America, an important medium term milestone.

We have upgraded AUM forecasts as Impax has already hit our previous target with five months remaining. Our growth assumptions are well below those recently achieved, and incorporate exits from older private equity funds, but no commitments to new PE funds beyond those announced so far. Strong performances by listed equity funds should offset the temporary impact of the wind-down of mature private equity funds, pending new commitments up to its Feb 2018 close (fees backdated to the Nov 2016 launch).

The outlook remains positive. The robust performance by all group investment strategies underpin its profile as a leading global investor in environmental markets. It continues to attract attention from institutional investors in the UK, continental Europe and the US.

Within the fund management sector Impax is showing impressive growth in AUM, revenues, EPS and dividends. It has demonstrated its skills as an investor in environmental markets, and its ability to capitalise on market shifts driven both by regulation and customer demand for energy efficient, less pollutive alternatives.

A collegiate culture means no dependence on ‘star’ fund managers (whose departure might mean loss of assets) and its core investment focus is in demand from investors. Yet market value is 2.2% of AUM, which are themselves growing rapidly.

We have increased our revenue forecasts by £1.5m (FY17e) and £1.9m (FY18e), and operating profit by £0.4m for both. The drivers which helped AUM double over the last two years remain intact. The financial model is cash generative, benefits from a declining cost ratio/improving operating margin. That will finance seed investment in new funds, possibly acquisitions, but also increases in dividends and the pay-out ratio, which we regard as conservative, despite the latest 40% increase in the interim distribution.

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